Navarro's Big Economic Picture

The most interesting aspect of the Fed’s decision last week was not that it cut interest rates by a quarter of a point but rather that it also injected another $40 billion or so liquidity into the system. Clearly, there is a credit squeeze going on right now that the Fed is very fearful of.

More broadly, this is a bizarre point in history when the traditional locomotive of the global economy, the United States, is cutting interest rates to stave off recession when just about every other economy on the planet is raising interest rates to stave off inflation. The only exceptions to this rule are those countries who happen to peg their currencies to the dollar.

Some of these countries include the Gulf States -- Saudi Arabia, the United Arab Emirates, Kuwait, and Bahrain. The predicament these Gulf States find themselves in shines a bright spotlight on the broader financial market disequilibrium plaguing the planet right now. Each of these oil-rich states peg their currency to the dollar. Each country is facing significant inflation, primarily because of the embarrassment of oil riches piling up in their treasuries which is filtering through their economies. Yet each country is being forced to cut their interest rates in lockstep with the Fed so as to keep their currencies aligned.

In reality, this is absolutely nuts. In reality, each of these countries is going to be forced to de-peg their currency. When this happens, the already suffering dollar is going to experience a huge downdraft. If the Gulf States do indeed de-peg, this may also set in motion a domino effect whereby other countries start dumping their dollar assets. At such a point, the Gulf States may also insist on using some other currency besides the dollar to-based oil prices on.

Of course, why this matters to you, dear trader or investor, is that it will not be a lot of fun holding US stocks and bonds when this depegging hits the fan.

This Week's Big Market Movers

It is a pretty light week on the macroeconomic calendar front. Wednesday will give us some insight as to the latest rate of productivity in the US economy. This is always an important number to watch because the higher the productivity, the less we have to worry about inflation. The problem of late has been productivity has been declining.

The other major report – and one I never miss – is the international trade stats. As the dollar keeps falling, our exports keep rising. Unfortunately, oil prices keep rising faster so we have not yet been able to reduce our trade deficit, despite the weaker dollar. At some point, it would be nice to see this change. It probably won’t be Friday, however.

The International Scene - Technical Take

For the fourth week in a row, the Globe is flashing a big bull's-eye. Every single ETF that I track is a buy from a technical perspective. The one BIG exception is SPY. It is showing strongly deteriorating conditions, reinforcing the point made earlier that there is a sharp contradiction between the recessionary atmosphere in the United States and inflationary, progrowth situation of the rest of the world.

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

The Market Edge Market Summary from www.marketedge.com 

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Peter Navarro
Irvine, California USA
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